State controller investigating Atwater finances

The State Controller’s Office announced Friday it will conduct an investigation of Atwater’s finances after the city failed to submit annual financial reports on time for five years and made substantial adjustments to numbers it reported to the state.

A letter addressed to city officials Thursday outlined several “red flags” that prompted the state investigation and financial audit. Some of those include late Financial Transaction Reports from 2008 to 2013 and an adjustment of 266 percent in the amount the city reported as its fund balance in 2010-11.

Jacob Roper, spokesman for the controller’s office, said some variances in financial figures are normal, but a 266 percent adjustment is significant.

“It’s not uncommon for a city to follow up with a report making small adjustments to make sure they are accurate,” Roper said. “But when the adjustments are of this magnitude, that is another flag that raises our concerns.”

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The letter also pointed to operating shortfalls of 53 percent in 2010-11 and 40 percent in 2011-12. A deficit in the city’s general fund balance increased from $3.9 million in 2011-12 to $4.2 million in 2012-13, an independent auditor’s report “expressed substantial doubt about the city’s ability to continue,” according to the letter.

The state agency concluded that there is reason to believe the annual Financial Transaction Reports submitted by the city were “misstated, incomplete, or incorrect.”

The Audits Division of the State Controller’s Office will sift through the records for 2011-12 and 2012-13, the letter said. State officials will hold a conference in May before beginning the investigation later that month.

“This is going to be a full financial audit and findings will be shared with any agency that does business with the city,” Roper said, adding that the audit will give recommendations to prevent similar issues in the future. “It’s just as important to identify problems as it is to help the city resolve them.”

The city will be responsible for the cost of the investigation, according to the letter, though Roper said it’s unclear how much it will be.

Bill Zenoni, a financial consultant hired a year ago to oversee Atwater’s budget, said the city was late in submitting the 2012-13 report, but still made it within the weeklong “grace period.” He could not explain why the reports were late for the previous years.

The 2012-13 report was late in part because of a shortage in city staff, Zenoni said, which impacted response times to requests from auditors. “It took a little bit longer than normal to close the books,” he said.

Zenoni said he did not know why the city’s fund balance figures varied by 266 percent in 2010-11, but said the independent auditor did not express “substantial doubt” about the city’s ability to continue.

“I believe that’s an exaggerated statement because I don’t think you’ll see the words ‘substantial doubt’ in the auditor’s statements,” Zenoni said. “To my knowledge, there’s nothing that has been misstated either purposely or accidentally.”

The state investigation comes on the heels of city officials adopting a balanced budget for the first time in three years, though a mid-year budget review in February showed a negative $4.2 million in the city’s fund balance.

“Of course I am disappointed,” said City Manager Frank Pietro, within an hour of seeing the letter Friday. “We have been working in the last year and a half to get back in the black and when I see a letter like this, I feel like we take steps backward.”

According to the letter, the city’s sanitation fund and water fund also operated with a cash deficit and didn’t generate enough revenues in 2011-12 and 2012-13 to cover expenses.

Pietro said utility rate hikes that began last year – and will increase over the next five years – will help bring the funds back to a positive position.

Atwater Mayor Joan Faul said she learned of the audit Friday after getting a call from the office of Sen. Anthony Cannella, R-Ceres. Faul said she knew the city’s financial figures had some variances, but said it could have been caused by several factors.

“We’ve had a very difficult time having people (finance directors) give us the correct numbers,” Faul said. The mayor said revenues not equaling what the city estimated could be another reason. “We finally had people get into the finances that know what they were doing. We depend on them to give us the correct information.”